Sebi reflects on market makers to deepen corporate bond segment

NEW DELHI: In order to develop and strengthen the corporate bond segment, the Indian regulator Securities and Exchange Board (Sebi) is considering the creation of a set of “market makers”.

These are entities that quote both a buy and sell price of corporate bonds in order to create liquidity in the secondary market for those bonds.

In addition, the regulator is in the process of finalizing the procedures for setting up a backstop mechanism for the purchase of corporate bonds.

In addition, Sebi plans to revamp the corporate bond database which is accessible to all investors, Sebi said in its annual report for 2020-2021.

This database will make more granular level information on debt covenants available to investors in the debt market, he added.

Recognizing the need to diversify the sources of funding for the country’s infrastructure needs, Sebi has focused its attention on creating a vibrant secondary market for investment grade corporate bonds.

The regulator has recently put in place several measures to facilitate liquidity in the secondary market.

“A proposed additional step aims to create a set of market makers who will be present in the market mostly on both the long side and the long side of investment grade corporate bonds,” the regulator said.

Sebi said he is developing appropriate eligibility criteria for these market makers to ensure that financially sound entities with the requisite expertise are encouraged to participate.

At the same time, the challenges of financing the cost of holding the stocks of these entities through various mechanisms – by setting up a back-to-back system with issuers, by creating a market for corporate bond repo’s that can finance the stockholding of market makers, among others, are also examined.

Regarding the support facility, Sebi along with other stakeholders, including the Ministry of Finance and the mutual fund industry, are in the process of finalizing the modalities for setting up the facility.

Based on a proposal from Sebi, an announcement in the Union budget for 2021-2022 was made regarding the creation of a backstop that would buy quality debt securities in times of crisis. and in normal times and would contribute to the development of the bond market.

The proposed support facility will operate as a standby entity and is envisioned to facilitate liquidity in the corporate bond market and to respond quickly to stressful situations, similar to the mechanisms available in developed markets around the world, Sebi noted. .

The facility will help bring liquidity and stability to the corporate debt market, fight risk aversion in times of stress, especially for securities rated below AAA, and boost stakeholder confidence market into the secondary market and create liquidity options for investors in general.

In addition, the regulator mentioned the pipeline of other proposals being developed to increase confidence in the corporate bond market.

In his report, Sebi said that mutual fund asset management companies (AMCs) are in the process of setting up an entity for recognition as a Limited Purpose Clearing Corporation (LPCC) for clearing and settlement of repo transactions on corporate debt securities.

The regulator has already published the framework of the LPCC which included a contribution of Rs 150 crore to the share capital of the LPCC proposed by the AMCs.

“It is expected that the entity formed by AMCs for pension compensation will be operational soon,” Sebi said.

In order to further develop and deepen the corporate bond market, Sebi plans to reorganize the existing rules relating to the issuance and listing of debt securities by removing redundant provisions, facilitating the issuance process. debt securities and adding investor protection and transparency provisions.

The regulator is also seeking to strengthen continuous listing requirements for listed entities to improve the granularity of information relating to financial data, material events including credit events, information relating to corporate governance. business, including transactions with related parties.

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